Anders v. Comm'r of Internal Revenue, Docket No. 5094-64.
| Decision Date | 06 September 1967 |
| Docket Number | Docket No. 5094-64. |
| Citation | 48 T.C. 815 |
| Parties | D. B. ANDERS, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
J. Glenn Hahn and Walter J. Kennedy, for the petitioner.
Edward E. Pigg, for the respondent.
An industrial laundry which provided a rental service of laundered apparels, coveralls, towels and other items, charged the cost of these items to expense when purchased. Most of the items had a useful life of 12 to 18 months, some longer depending upon how frequently washed and whether of seasonal use in the case of light or heavy materials. Some had the name of the employer-user and in some cases of the individual employee embroidered thereon. The corporation adopted a plan of liquidation under sec. 337, I.R.C. 1954, sold substantially all its property to a new corporation, and distributed its assets within 12 months to its sole stockholder. In arriving at the purchase price $233,000 was allotted to the rental items in circulating use, the cost of which had been charged to expense. Held, the gain realized upon the rental items in the liquidating sale is, pursuant to sec. 337, not recognized to the corporation.
Respondent determined a deficiency in income tax of D. B. Anders, Inc., for the taxable year ended July 31, 1961, in the amount of $121,160 and notified petitioner that the deficiency and interest, constituting his liability as transferee of assets of the corporation, would be assessed against him. The sole issue is whether, in a liquidation under section 337 of the Internal Revenue Code of 1954, the corporation is entitled to the nonrecognition of gain on items, the cost of which has previously been deducted. Petitioner claims an overpayment.
The stipulation of facts and the exhibits attached thereto are incorporated by reference.
D. B. Anders is an individual residing in Shawnee Mission, Kans.
Service Industrial Cleaners, Inc., was a corporation organized in August 1947 under the laws of Kansas with its principal offices in Kansas City, Kans. At all times material its stock was owned by D. B. Anders directly or through his nominees. By amendment filed May 17, 1961, its name was changed to D. B. Anders, Inc. This corporation is referred to herein as Service, or as the corporation.
Service filed a corporation income tax return for the fiscal year ended July 31, 1961, on an accrual basis, with the district director of internal revenue at Wichita, Kans., on January 15, 1962, pursuant to an extension granted.
Service was engaged in the business of conducting and providing a rental service of cleaned and laundered towels, seat covers, fender covers, wiping materials and dust cloths, coats, coveralls, shirts, pants, and other textiles and apparels, including dusting and wiping equipment, sweeping tools, mops, and accessories, herein referred to collectively as rental items, as well as conducting a cleaning and laundering service of substantially the same type of items owned by others, and in general conducting an industrial laundry business.
For Federal income tax purposes Service charged to its expense accounts when purchased the cost of the rental items used in conducting its rental service business. At the end of each taxable year the expense accounts were credited with the costs of the ending inventory of items which had not been placed in service at the end of the taxable year.
In its taxable year ended July 31, 1961, prior to May 1961, Service had approximately 500 accounts to which it was furnishing laundry rental service. The average weekly gross income from rental and other laundry business was from.$19,000 to $20,000. Some 13 percent to 20 percent of this was attributable to laundry of property of others, referred to as NOG (not our goods). The remainder was attributable to laundry rental business.
The garment rental business was normally handled on a yearly contract basis. Service had about 40,000 garments in circulation. Most of the items had a useful life of 12 to 18 months, some longer, depending upon how frequently washed and whether of seasonal use in the case of light or heavy materials. Some had the name of the employer-user and in some cases of the individual employee embroidered thereon. Its garment customers included General Motors, Ford Motor Co., Trans World Airlines, and Bendix, as well as garages, florists, filling stations, motorcar dealers, and small manufacturers. Its shop towel customers included railroads, pipelines, garages, filling stations, printers, and paint factories. Union Pacific Railroad was serviced on a system-wide basis from Service's plants in Kansas City. Office buildings were the principal users of its dust control items. Service's replacement costs of these items averaged about $200,000 per year.
In May 1961 Anders reached an agreement for the sale of Service's business to a group of persons. The purchasers desired to carry on the business under a different corporation with the same name.
On May 12, 1961, the board of directors and the stockholders of Service adopted resolutions approving and authorizing the sale of the corporation's properties and business, changing the corporate name to D. B. Anders, Inc., and adopting a plan of complete liquidation pursuant to the terms of section 337 of the Internal Revenue Code of 1954.
As of May 16, 1961, Service entered into an ‘Agreement of Sale’ with Albert Gitlow, Abraham Gitlow, Ben F. Singer, and Joseph L. Fradkin, herein referred to as the purchasers, acting in behalf of Service Industrial Cleaners, Inc., a Kansas corporation, formed on or about May 17, 1961, which corporation is hereinafter referred to as buyer.
Under the agreement, Service, as ‘Seller’ and the named individuals, as ‘Purchasers' agreed to the sale and transfer to the purchasers or their assigns of all seller's inventory of the articles used in conducting the seller's rental service business, furniture and equipment, accounts receivable, interest in real property, name, routes, customers' patronage, and goodwill.
The price was computed in the contract as follows:
+----------------------------------------------+
¦Inventory of rental items ¦$228,000¦
+-------------------------------------+--------¦
¦Furniture and equipment ¦88,500 ¦
+-------------------------------------+--------¦
¦Sweeping tools, mops, and accessories¦5,000 ¦
+-------------------------------------+--------¦
¦Goodwill and customer patronage ¦110,000 ¦
+-------------------------------------+--------¦
¦Real property ¦78,000 ¦
+-------------------------------------+--------¦
¦ ¦ ¦
+-------------------------------------+--------¦
¦Total ¦509,500 ¦
+----------------------------------------------+
In addition, there was to be paid a sum equal to the trade accounts receivable at the close of business May 17, 1961, and prepaid items as of that date.
The parties also agreed that the foregoing price did not include new, unused, and unwashed garments and rental service items, new and unused sweeping tools and washroom supplies, fuel, and new automobile and truck tires, and that there would be added to the: price an amount equal to seller's cost of such items.
As of May 17, 1961, Anders entered into a covenant with the purchasers to refrain from competition with them or their corporation in the conduct of rental service or laundry business.
As of May 22, 1961, Service, then known as D. B. Anders, Inc., entered into an agreement with the purchasers to a similar effect. As of the same date the corporation delivered to the buyer a bill of sale of certain of its assets. On or about May 22 or 23, 1961,the sale by the corporation of substantially all its assets to the buyer was completed.
Pursuant to the plan of liquidation the corporation distributed all its assets in complete liquidation to petitioner, its sole stockholder, within the 12-month period beginning May 12, 1961.
The corporation filed with the secretary of state of the State of Kansas its resolution of dissolution in April 1962 and its corporate existence ceased.
It is stipulated that the corporation is entitled to a deduction for depreciation on its building and improvements, machinery and equipment, and office equipment for its taxable year ended July 31, 1961, in the amount of $7,370.77.
The corporation paid its Federal income taxes for its taxable year ended July 31, 1961, as follows:
+-------------------------+
¦Date Paid ¦Amount ¦
+--------------+----------¦
¦Oct. 13, 1961 ¦$20,000.00¦
+--------------+----------¦
¦Jan. 15, 1962 ¦11,063.38 ¦
+-------------------------+
Petitioner paid additional Federal income taxes assessed against the corporation for its taxable year ended July 31, 1961, as follows:
+------------------------+
¦Date Paid ¦Amount ¦
+--------------+---------¦
¦May 27, 1963 ¦$3,832.80¦
+--------------+---------¦
¦Oct. 28, 1963 ¦5,994.30 ¦
+------------------------+
On its income tax return for the fiscal year ended July 31, 1961, the corporation reported a gain of $446,601.89 arising out of the sale of substantially all its assets to the buyer, and claimed exclusion of such gain from taxable income under section 337, I.R.C. of 1954. The gain reported included $233,000, which was the amount of the consideration received by Service from Buyer allocated to the items-in-use in its laundry rental business.
The inventory of rental items which were transferred in the sale had a basis of zero to the corporation.
OPINIONPetitioner owned all the stock of Service Industrial Cleaners, Inc., a Kansas corporation organized in 1947, which adopted a plan of liquidation in May, 1961, sold its property, changed its name to D. B. Anders, Inc., and within 12 months after the adoption of the plan distributed all of its assets in complete liquidation to him. The corporation duly filed a notice...
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